Canada Trade, Plain and Simple

The Bank of Canada held its benchmark overnight rate steady at its last meeting in early September. Like the Federal Reserve, Canada’s central bank has been “tightening.” The policy lever had been lifted four times starting in July 2017. It is expected that when monetary officials meet in Ottawa tomorrow they will vote for a fifth.

In recent weeks, though, uncertainty surrounding Canada’s economy has measurably increased. The employment report for the month of August was sharply lower. Though payrolls rebounded in September, there can be no doubt that the outsized gains in 2017 have vanished in 2018.

Therefore, what’s at stake in terms of the Bank of Canada is whether or not they will heed the message, or, as most often central bankers do, just ignore everything in favor of their current views. What it means in the latter case is more than just moving (monetarily) irrelevant benchmarks around.

Three weeks after the last official gathering, Canada’s central bank launched what it has called a major initiative. On September 28, officials introducedThe Economy, Plain and Simple. BoC Governor Stephen Poloz explained:

Along with our outstanding Museum and website, the new publication helps Canadians better understand the economy and the Bank’s role. Ultimately, this understanding helps people make more-informed financial decisions and makes our own policies more effective.

It is impossible not to see Milton Friedman’s final warning here. Much of what is done by these central banks in the 21st century is done in his name, and yet Friedman in one of his last interviews recognized the inherent contradiction.

The difficulty of having people understand monetary theory is very simple—the central banks are good at press relations. The central banks hire people and the central banks employ a large fraction of all economists so there is a bias to tell the case—the story—in a way that is favorable to the central banks.

The Economy, Plain and Simple is a clear example of what he was talking about. Governor Poloz wants all Canadians to be on the same page as its central bank. It proceeds from the premise central bankers hold all the answers about the economy. They don’t. Recent monetary policy history in Canada shows too often officials aren’t really aware of what’s actually happening.

One of the inaugural papers published for this grand project was a cloaked defense of globalization; at least, the globalization as it was in its form of the past few decades. The term itself wasn’t mentioned at all in the paper, rather it was all about the benefits of “free trade” especially for Canadians.

For decades, as trade among countries has grown, so has the world’s wealth. Here in Canada, roughly 1 in 6 jobs is linked to exports. Economists estimate that incomes in Canada are 15 to 40 per cent higher thanks to freer trade.

The theory of free trade is sound, most people readily accept these virtues, and I have no doubt those statistics are accurate, or at least close enough. But in that situation, you would think the Canadian central bank would be doing its absolute best so as to understand not just Canada’s place in this global system but more so how this global system actually works – if for no other reason than being prepared for changes beyond its grasp.

After all, if the economy there is so very exposed to the whims of worldwide factors, domestic monetary policy pales by comparison.

It’s exactly what we find in the economic accounts that so far in 2018 the Bank of Canada is trying so very hard to dismiss. Not only has employment cooled, to put it mildly, unsurprisingly consumer spending has, too. The two are very much related, and they are not being driven by interest rates or monetary policies in Canada (or elsewhere).

Retail sales, for example, fell off a cliff to begin this year. Like Europe or China, it’s as if the Canadian economy hit a wall right when we started to notice eurodollar irregularities spreading throughout the world. Retail sales have gained 4% or less in every month of 2018, meaning it doesn’t look like there is going to be a rebound anytime soon. It is a clear departure from Reflation #3.

WorldwideReflation #3.

If monetary tightness in the true global reserve currency torpedoes global trade, we would expect to see the negative results of that dysfunction in economies most closely associated. Canada, as its central bank has noticed, is right at the top of the list.

And still, the bank at its last policy meeting only had this to say about the return of what US Economists had confusingly called overseas turmoil in 2015.

Meanwhile, financial stresses have intensified in certain emerging market economies, but with limited spillovers to other countries.

Canadian consumers and employers might beg to differ about “limited spillovers.” It would require, of course, central bankers who listened to people out there in the real economy perhaps telling a very different story rather than those who dictate to the very same people the official version of what they might not be seeing at all.

This one, what sure looks like a fourth eurodollar squeeze in a series dating back eleven years, can’t be blamed on some oil supply glut, the “transitory” factor supposedly responsible for the third eurodollar interruption starting around June 2014. In Canada’s case, that series is quite elegantly on display: the dollar falls and reflation just shows up; it “rises” and the economy tails off.

Only it’s neither the US nor the Canadian dollar that commands each direction. The system may be denominated in US dollars but in truth it’s the eurodollar which runs the world. It won’t be making an appearance in The Economy, Plain and Simple. And it won’t be talked about tomorrow in Ottawa as confused central bankers wonder, in private, what is really going on here.

Regardless, as Friedman regretted twelve years ago just before the big systemic break, the Bank of Canada will tell its version of the economic story anyway and that’s the one first the media and then everyone else will rely upon even as it deviates further from experience. Populism is really pretty easy to explain.